The need to hold Greek feet to the fire

Commentary: Athens must restructure its economy now

BarryD. Wood

WASHINGTON (MarketWatch) — Greece can and should remain in the euro zone. It is best for Greece, Europe and the global economy.

But in order to avoid sovereign default and stay with the euro, Athens must actually implement needed growth-oriented reforms.

While a majority of Greeks oppose the austerity associated with successive bailouts, they do not wish to give up the euro. A May 2012 poll by the Pew Research Center found that 71% of Greeks want to keep the euro and remain in the euro zone. A Greek exit and return to the drachma, viewed as inevitable by some analysts, would likely have a devastating effect.

Reuters

The head of Greece's leftist Syriza Party Alexis Tsipras says Greece is doing all it can to avoid leaving the euro. Barry Wood disagrees.

Jacob Kirkegaard of Washington’s Peterson Institute for International Economics is among the economists warning that a Greek exit would trigger rampant inflation, the collapse of Greek banks, and a deepening of the four-year long depression that has already reduced Greece’s gross domestic product by nearly 20%.

Similarly, a Greek withdrawal would be costly and disruptive to Europe. “The question,” says Bank of America chief economist Mickey Levy, “is whether a Greek exit would be smooth or jarring.” He suspects trouble as liabilities within the euro zone’s payments system are sorted out, resulting in significant costs to core countries, particularly Germany.

Other economists such as Citigroup’s Willem Buiter argue that the principal risk from a Greek departure is “exit fear contagion.” It would, he says, “mean that an unbreakable commitment will have been broken — the irrevocable membership of the Euro Club will have been revoked.” Market contagion amid speculation as to which country is next to leave would ensue.

Most distressing in this Greek tragedy is how much time has been lost while relatively little has been accomplished. Greece is the beneficiary of unprecedented international assistance intended to make a weak economy more competitive. The March 2010 loan from the International Monetary Fund was the biggest ever granted by the multi-lateral lender. This year’s write down of €100 billion of debt was the biggest ever agreed to by commercial banks. And this year’s expanded bailout is worth €130 billion, most of it coming from Greece’s European Union partners.

But despite massive support, successive Greek governments have only half-heartedly implemented promised reforms. By comparison, Latvian Prime Minister Valdis Dombrovskis says his country’s painful restructuring in 2009-10 succeeded because the reforms were front-loaded and there was an ongoing social dialogue. Latvia’s austerity program or internal devaluation resulted in a 25% drop in GDP. A slow recovery has now taken hold with growth projected at 2% this year, which is expected to be the fastest in the European Union.

Marek Tatala, an associate of Leszek Balcerowicz, who promulgated policies that built a market economy in Poland 20 years ago, blames “delays in structural reforms like lowering minimum wages, liberalizing restricted professions, easing rules in the public sector, deregulation and improving the environment for entrepreneurs” for holding back a Greek recovery.

Sadly, many of the reforms have not been carried out and the coalition government of conservatives and socialists that emerged from elections in June wants to roll back much of what has been achieved.

Athens economist Miranda Xafa, CEO of E.F. Consulting, says to recover Greece must tackle the structural rigidities that made its economy dysfunctional. “What led Greece into this mess,” she says, “is its ineffective, incompetent, and corrupt political establishment, which viewed politics as a means of providing favors to special interest groups in exchange for vote-buying.”

Xafa says it is inexcusable that one of every four jobs in Greece is in the public sector, which she believes should be cut by half. She has little hope that the unwieldy coalition led by conservative Antonis Samaras will succeed where others failed.

Since becoming prime minister a month ago, Samaras has backed off a campaign pledge to renegotiate Greece’s bailout agreement. Instead, he now emphases that more time is needed to get the fiscal deficit down to targeted levels.

The main opposition, the far-left Syriza Party of firebrand Alexis Tsipras, is attacking Samaras for embracing austerity. Tsipras says it is austerity that will lead to Greece exiting the euro. Previously, he argued that a Greek exit would be so costly for Europe that creditors were bluffing when they threatened to withhold loan disbursements. Should a rupture occur, Tsipras is adamant that the blame be placed on Germany and other creditors, not on Greece.

For now, the charade goes on.

Experts from the IMF, European Union and European Central Bank are in Athens assessing progress or lack thereof. Their report, expected in September, will set the stage for the next phase of the drama.

In the meantime the Greeks will say they have done a lot and can do no more. Creditors will say “yes, you can have more time, but recovery won’t occur without fiscal discipline and deeper structural reforms.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.